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Saudi Aramco Makes Existential Bet On Oil

Undeterred by the prospect of peak oil demand, Saudi Arabia is betting its long-term future on oil.

Not only is Saudi Arabia pouring investment into lifting oil production capacity at home, but it may even, for the first time, venture abroad in order to grow its oil business.

“We are no longer going to be inward-looking and focused only on monetising the kingdom’s resources,” Saudi oil minister Khalid al-Falih told the Financial Times in an interview.

“Going forward the world is going to be Saudi Aramco’s playground.”

Saudi Arabia’s oil reserves are so vast that Aramco has not really needed to look abroad for oil. At over 260 billion barrels, Saudi reserves are second only to Venezuela, although much cheaper to produce.

In recent years, Saudi Arabia has had two somewhat contradictory strategies. On the one hand, Aramco has stepped up investment in both oil and gas, hoping to increase capacity in the years ahead. The projects were intended not only to offset depletion at aging fields, but also to increase spare capacity. Heavy investment would ensure Aramco’s – and the country’s – dominance in the oil market for years to come.

At the same time, crown prince Mohammed bin Salman laid out an ambitious economic transformation agenda to diversify the Saudi economy away from oil. That involved growing the private sector, and using proceeds from the Aramco IPO to make a down payment on a new economy.

MbS’ vision has largely stalled out, and his so-called domestic reforms have papered over a tightening dictatorial grip. Meanwhile, his adventures abroad – the war in Yemen, the blockade of Qatar, and the slaying of Saudi journalist Jamal Khashoggi – have tarnished his once-glittery image. The darling of the west until only recently, MbS squandered his (arguably unjustified) goodwill.

Now MbS’ much-hyped “Vision 2030” is in tatters. The Aramco IPO was delayed, in part because top Saudi officials fear it would open up the company to too much scrutiny. The Wall Street Journal reported earlier this month that it might never happen.

Instead, Saudi Arabia is going right back to its pre-MbS roots. Rather than diversifying, Saudi Arabia is going to look abroad for more oil. When asked by the FT if Saudi Aramco is looking to become an international player like ExxonMobil or Shell, al-Falih responded: “Correct.”

The first item of business will be to create a “global gas” business. The FT noted that Aramco has discussed major investments in Russian and American LNG projects, while al-Falih mentioned Australia as a possibility.

Aramco is also making a major bet on petrochemicals. Aramco is expected to turn to the bond markets to help pay for a $70 billion stake in Sabic, the Saudi petrochemical company.

In other words, the economic transformation plan for the Saudi economy, envisioned by MbS, is starting to look not all that transformational. Saudi Arabia is hitching its wagon to oil and gas for decades to come. To be sure, the slight pivot into gas and petrochemicals is a strategy that not just Aramco is pushing. The oil majors, too, see gas and petrochemicals as a safer long-term bet than simply crude oil as peak demand nears.

Nevertheless, doubling-down on oil and gas is ultimately an existential bet on the world not moving on from fossil fuels. The Saudi budget breaks even with crude oil north of $80 per barrel. Brent has traded below that threshold for most of the last five years. Oil prices could certainty rebound above that level, but only the most bullish forecasters believe Brent will consistently trade above $80 in the years ahead.

Even in the medium-term, the risks are serious. “OPEC's production growth outlook over the medium term remains clouded by ongoing sanctions, geopolitical risks, competitive non-OPEC supply, low oil prices, and demand concerns,” Bank of America Merrill Lynch wrote in a recent report.

Saudi oil minister Khalid al-Falih put on a brave face in his interview with the FT, bolding claiming that Aramco could outcompete other oil majors. “We can stand shoulder to shoulder with anyone and outdo them,” he said. However, Aramco’s peers – state-owned or not – also face existential risks from the prospect of peak demand.